The NHS faces a new bill of £1.2bn a year due to changes to the so-called Ogden discount rate used to calculate payouts.
Photograph: Dominic Lipinski/PA

The first case settled under controversial new compensation rules for serious injuries has seen an NHS trust forced to nearly triple its payout to a 10-year-old girl left with cerebral palsy from £3.8m to £9.3m.

The case, involving East Lancashire Hospitals NHS trust, will send fresh shockwaves through the NHS and insurance companies, which have been braced for big increases in claims since the new “Ogden” formula was announced last month.

Despite intensive lobbying, the new rules came into force this week, and immediately resulted in a dramatic escalation in one payout. As recently as January, it was agreed that the 10-year-old would receive a lump sum capitalised at £3.77m, but this will now be increased to £9.29m.

NHS faces £1bn annual bill after 'reckless' change to injury payouts

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Her solicitor, Leonie Millard of Forbes Solicitors in Accrington, said: “The benefit for the claimant from the new -0.75% discount rate, is immense. It vastly improves the long-term future financial ability to meet her needs for the rest of her life, which is expected to be long. Her parents are comforted to know that there is funding to ensure that her needs are properly met when they are no longer around.”

Until now the Ogden formula for paying out compensation assumed that the claimant could earn 2.5% interest a year on a lump-sum payment. But under the new rules, the rate is assumed to be -0.75%.

In documents published after the budget, it emerged the government’s finances will take a near-£6bn hit as a result of the increased bill faced by the NHS and other parts of the public sector as a result of the changes made to the way compensation awards will now be calculated.

The Office for Budget Responsibility said the government would be setting aside an extra £1.2bn a year to meet the expected costs to the public sector – and it would push up car insurance premiums by about 10%.

The Association of British Insurers said it was “crazy” that up to 36m insurance policies could be affected in what it alleged would be “over-compensating” a few thousand claimants a year.

It is estimated that the cost of the average car insurance policy could increase by £60 a year, but for younger and older drivers, the increase will be higher. Comparison site comparethemarket.com said the average price for drivers aged 17 to 20 will rise by £115 to £1,650. The total increase in premiums paid by all motorists is expected to reach £2bn.

Direct Line, one of Britain’s biggest insurers, has already blamed a £217m slump in profits on the new Ogden rate, as it pencilled in bills for some individual cases doubling from £10m to £20m.

The lord chancellor, Liz Truss, has said there will be consultation on the new rules, but the insurance industry says it has yet to be told the shape of any reforms that might be forthcoming.

The ABI said: “The first wave of impacts on insurance costs are already being felt. A number of insurers have already publicly confirmed that premiums are going up as a result of the decision in February to cut the discount rate.”

Huw Evans, director general of the ABI, said: “The massive rise in insurers’ claims costs, which makes premium rises for millions of customers inevitable, results from a wholly avoidable decision by the lord chancellor. It was based on pressure from claimant lawyers, poor legal advice and an outdated formula that does not reflect the choices available today for a prudent claimant. With the public purse hit by £6bn, the government consultation cannot come soon enough.”

But Michael Redfern, the QC who was counsel for the 10-year-old girl, known only as “LMS”, said: “The large increase in lump-sum awards is offset by lack of return on lump-sum low-risk investment and the ability to keep pace with inflation.

“We welcome the new discount rate, the first change in 17 years, which addresses the actual lack of meaningful return on safe lump-sum investment opportunities. The only person to benefit from the new discount rate is the claimant. It has no impact on legal costs.”